The world after the pandemic. The role of Europe and China
How and when will we emerge from the worst crisis of the last 70 years? The partnership between Europe and China will be crucial
Giuseppe Scognamiglio, nato a Napoli il 16 luglio 1963. Diplomatico, Manager, Giornalista, Professore. Direttore della rivista eastwest
2020 has certainly been the worst year in our recent history. More than 100 million infected, 2 million deaths, a 4,3% decline of world GDP and total blocking of crucial sectors of the economy. Manufacturing has been one of the most affected by the economic downturn. According to the United Nations Industrial Development Organization (UNIDO), the Index of Industrial Production (IIP), which reflects countries’ volume of production, has fallen significantly in recent months. In particular, analyzing the performance of 62 countries, which together account for 90% of world manufacturing value added (MVA), UNIDO has calculated that the average IIP percentage decrease across countries in March 2020 compared to December 2019 was 5.6%, while the average percentage decrease between March 2020 and June 2020 was 2.5%.
Tourism is another sector dramatically hit by the pandemic. Experts estimate that international tourist numbers have declined from between 58% to 78% in 2020, with a drop in visitor spending from $1.5 trillion in 2019 to between $310 and $570 billion in 2020, putting over 100 million direct tourism jobs at risk. Strictly related to tourism is the sector of international passenger traffic, which suffered a dramatic 60% drop over 2020, according to ICAO, the UN’s International Civil Aviation Organization.
The economic losses amount to 370 billion dollars, with airports and air navigation service providers losing a further 115 billion and 13 billion, respectively.
These are numbers that take us back to the middle of the last century, when two world wars halted normal life in half the countries of the world. In this unforgettable year, there are no countries immune from the effects of the pandemic, with the partial exception of the very isolated Taiwan. The difference between 2020 and 2021 is that we have moved from counting infections to counting vaccines.
EU and the role played by ECB
2021 will wipe out the pandemic, but only if we manage the vaccination campaign better than how we organized resistance to contagion. The European Union is playing, and it will play, a key role in this sense. Once again in European history, nation states have shown their inability to properly face a health emergency in the first place, but also and above all the economic and social one. Indeed, without the EU, no member state would have been able to autonomously face a crisis of this magnitude. In this sense, it is important to mention the ECB's willingness to buy government bonds of member countries in difficulty, an intervention that is part of a broader set of monetary policy and banking supervision measures aimed at mitigating the impact of the coronavirus pandemic on the euro area economy. Such a measure has allowed Italy to maintain access to international financial markets despite a public debt that is now reaching 160% of GDP.
“Extraordinary times require extraordinary action. There are no limits to our commitment to the euro. We are determined to use the full potential of our tools, within our mandate” (Christine Lagarde, President of the ECB). The role played by the ECB will remain crucial over the coming years; its relevance has been acknowledged by the latest S&P and Fitch Italian sovereign rating reviews. S&P confirmed Italy’s sovereign rating at BBB, while upgrading the outlook to stable from negative, thanks mainly to the combined strong support from monetary and fiscal policy. According to the rating agency, the pandemic has had a significant impact on Italy’s economy and the sovereign’s fiscal position. The high debt-to-GDP ratio will weigh on the rating, while the latter will be supported by a diversified and high value-added economy.
Furthermore, to the problems linked to containment of the infection, those of an organizational nature must certainly be mentioned. They correlate firstly to the production of vaccines and secondly to their distribution. The European Union has been of fundamental importance in guaranteeing the survival of its member states thanks to the adoption of timely and organic measures in the sectors of health and economy. First of all, the European Union allocated 200 million euros towards the research of a vaccine at the beginning of the pandemic; this funding was essential in order to guarantee the development of the anti-Covid vaccine. The product, manufactured in just 11 months, has condensed technical characteristics that open a new frontier in the treatment of other serious diseases, such as cancer. Moreover, the European Commission itself negotiated the purchase of vaccines from the six pharmaceutical groups whose studies seemed most promising. In total, nearly 2 billion doses have been acquired: 200 million from Pfizer, 160 from Moderna, 400 from AstraZeneca, 300 from Sanofi, 400 from Johnson and 405 from CureVac. It is not certain that all the vaccines will prove to be sufficiently safe and effective, and that they will therefore receive authorization from the European Medicines Agency (EMA). This fact confirms that only an economic power like the EU could have first funded research and then bought massive doses of vaccines, without being sure that the studies in progress would have been successful.
New vaccine doses
In recent days, Ursula Von Der Leyen announced the purchase of an additional 100 million Pfizer-BioNTech doses (whose effectiveness is 90%), exercising an option to purchase more doses provided for in the contract previously signed between the two companies and the European Commission. The vials will be distributed according to population, but adjustments are possible between member states according to needs, since some countries may be interested in obtaining more doses than others.
As of January 20th, China occupies the first place in the world by total number of vaccinations administered (15 million doses), while Italy is the second highest EU member state on the chart (1.434.550 million doses) after Germany (1,78 million doses).
On the economic side, a total of € 1 trillion was allocated to support and revive the European economy. Moreover, the European Central Bank (ECB) has undertaken an unprecedented effort in purchasing government bonds with the aim of guaranteeing the solvency of the countries, their presence in the markets without risk of bankruptcy and economic spillover. Moreover, the Eurogroup and the Commission have decided to suspend the rules of the stability and growth pact. By undertaking such a historic decision, the European Union has proved to be at the service of member states and European citizens. Indeed, it is the first time in the history of the European integration process that federal decisions have been taken, such as the Next Generation EU plan, allocating € 750 billion as follows:
- € 390 billion distributed in the form of a grant to Member States;
- € 360 billion in the form of loans.
The European Union, acting as a federation of states, has taken decisions that envisage interventions no longer in support of the most virtuous countries (theorem of the stability pact) but in favor of the neediest and most affected by the crisis (€ 209 billion have been assigned to Italy, of which € 127,4 in loans - the largest share among member states). The pivotal point of the federal principle consists of the reallocation of financial resources from the core to the periphery according to the needs of any single member. These funds will be crucial in determining the reconstruction of economies after the prolonged crisis.
In these two macro-areas in which Europe has intervened, namely health and economy, there is room for cooperation with China. Concerning health issues, the EU and China should join forces in strengthening the role as well as the organizational and intervention capabilities of the World Health Organization (WHO). Among the necessary measures to take are the establishment of a cutting-edge research center under the supervision of the Director General of the organization, and the constitution and the deployment of an independent task force to investigate issues and to intervene promptly in case of need so that the world is never again caught by surprise. In this regard, WHO should have carte blanche on freedom of intervention in carrying out inspections, controls and data collection in all countries, without the need for authorizations that would slow down or even compromise the practices. A crucial issue regards financing to WHO. Indeed, in order to strengthen the capabilities of the organization, an increase in contributions is necessary as this crisis has shown us the vital importance of WHO and of medical research. In this regard, President Trump's accusations of connivance by the WHO with China were particularly out of place. If we look at the list of contributors to WHO budget, the United States and American private foundations are at the top with millions of euros in contributions, while China is only tenth with a much smaller sum (which I hope can be increased).
In addition, today we Europeans have discovered that we import 50% of our stock of production masks, 40% of antibiotics and 90% of penicillin from China. Not even a gram of paracetamol is produced in Europe! A pandemic crisis like the one we are experiencing has exposed the difficulty of quickly procuring all the sanitary equipment necessary to deal with the coronavirus promptly and effectively. Indeed, the Covid-19 pandemic has revealed how fragile global supply chains can be in times of widespread crisis and emergency. In this sense, the European Commission is implementing a "European RescEU" plan to create processing and storage sites in Europe for those health products considered strategic, so as to reduce dependence on a single country. However, we should not go any further. It is not our intention to replace products of Chinese origin but rather to integrate them through intelligent cooperation, thus creating deposits in Europe for an effective and quick distribution.
We are in fact convinced that only thanks to the interconnection of world research centers and the impressive capacity for progress provided by new technologies, will it be possible to equip ourselves to fight this virus as well as future diseases. EU-China scientific cooperation is governed by the Science and Technology Cooperation Agreement signed in 1998 and renewed for the third time in 2014. Moreover, a specific High Level Innovation Cooperation Dialogue (ICD) was set up in 2012, with the aim of intensifying the level of research and innovation relations between China and the EU. Finally, in 2017, a new package of mutual initiatives was lunched in order to boost cooperation in several fundamental sectors, including food, agriculture, environment and sustainable urbanization, biotechnologies for environment and human health. Taking advantage of the respective technical expertise of each, the EU and China should boost research and experiments in these fields as close partners, able to come up with safe and effective alternatives.
EU-China economic relations
Last but not least is economic interconnection. Growth should be guaranteed and great investment projects, such as the New Silk Road, should be taken up and re-launched by involving as many players as possible, not only national states but also large international banks and private businesses. The Belt and Road Initiative (BRI) is a colossal investment operation; if Italy does not seize the opportunity, it will make a serious strategic mistake, with huge negative consequences that will stretch out over the next 30 years. Environment, demography, technological innovation, migrations and the energy question are just some of the great global challenges on the table of political leaders. Alone, no country has enough strength and resources to eradicate the virus and consequently restore economic and social issues.
Despite the huge damage to global trade, Covid-19 could help bolster China's Belt and Road Initiative. Going into the details of the operation, the initiative is Chinese but in reality it concerns many other regional and global actors. More than 290 billion dollars have been allocated for more than 1400 projects and part of the funds come from the Asian Development Bank among whose shareholders are Japan and the United States (15.6%), Germany (4.3%), France (2.3%) and Italy (1.8%). We should therefore not be surprised by the frontline role of Italy, the first European country to join the project when the then Deputy Prime Minister and Minister of Economic Development Luigi Di Maio signed three Memoranda of Understanding with China in March 2019. In Europe, the reception was enthusiastic on the one hand and decidedly lukewarm on the other. Rome has strong ties to the Chinese and Europe has had to rethink its approach to the BRI after initial skepticism. The MoU marked a break among the ranks of the G-7, raising important concerns from Washington that Italy would become an entry point for Chinese influence in Europe.
In reality, Chinese investment in Italy’s key industries, including energy and telecommunications, has been growing since 2013. The Chinese presence in Italy is well received in all strategic sectors of the economy; increasing the scale of investments in Italy would mean for Beijing not only ethically correct and environmentally sustainable investments, but it could also be used for reputational reasons. In fact, it is undeniable that the pandemic crisis and its management have cracked the already fractured image of China in the world. In this sense, if cooperation remains the main theme, it will be necessary for Beijing to review its regulations in order to attract investments, especially financial ones. Without access to controlling stakes (to date, financial institutions can control up to 25%), trust remains limited and so do investments. Therefore, symmetry is a key element for relationships to improve and investments to be made on an equal basis.
China matters to the EU and the EU also matters to China. It is essential to re-launch multilateral cooperation at the global governmental level. The EU-China Comprehensive Agreement on Investment (CAI), signed in December 2020, represents “the most ambitious agreement that China has ever concluded with a third country”, with specific regards to investment, and a big victory for both Chinese diplomacy and European business. Participants to the meeting welcomed the active role of the German Presidency of the Council, and of Chancellor Angela Merkel in particular, who has put special emphasis on EU-China relations and fully supported the EU negotiations with China.
Mrs. Merkel has defended her commitment to dialogue with China. She argues that without co-operation with and from Beijing, the world cannot hope to properly deal with or solve some of its biggest challenges, including climate change. The CAI will ensure that EU investors achieve better access to a fast growing, 1,4 billion consumer market, and that they compete on a better level playing field in China. This is important for the global competitiveness and future growth of EU industry. China is the EU's second biggest trading partner and, when looking for a stable and legally secure environment, Europe is now the most important destination for Chinese companies' foreign direct investment. The EU can support China's economic reform programme with its know-how and already established best-practices, and it can use its many channels of dialogue with China to share ideas and experience. This Agreement is certainly of major economic significance but it also binds the parties into a values-based investment relationship grounded in sustainable development principles. Last but not least, the European Commission welcomed the Agreement as a “success story” because China has committed to effectively implement International Labour Organization (ILO) fundamental conventions, including the one on forced labour.
Returning to our main topic, the world will be definitively out of danger only when at least 4 of the 7,8 billion inhabitants of the earth will be vaccinated (those under 20 do not necessarily need the vaccine, apparently). Some countries are doing better than others and the issue of vaccine doses in poorer countries is sensibly and crucially increasing. The virus does not seem to want to stop. China and the EU, as two of the most affected regions of the world during the first wave, must cooperate to provide a fulcrum against the spread of the disease. Responsible coexistence with the virus is today the only possible way not to arrest the global system, incurring irreversible damage. In the first three weeks of the vaccination campaign, just over 70 million people worldwide were vaccinated. To achieve an acceptable result in 2021, we should vaccinate 10 million a day. We need to speed up.